Lecture 22-23 (Partnerships) Flashcards
Differences between partnership accounting and company accounting.
No share capital or retained earnings.
Instead have capital and current accounts.
Need to think about how to share profits.
Companies Act, accounting standards etc. not enforceable, but best practice.
CAPITAL
The amount that each partner contributes to the business. Does not need to be equal.
How are partners rewarded for having larger amounts of capital in the business.
Normal to provide interest on capital.
Partners can withdraw cash from the business, but it is in the best interests of the partnership if cash withdrawals are:
As little as possible
A late as possible
Therefore, normal to charge interest on drawings.
CAPITAL ACCOUNTS
One for each partner
Record fixed capital contributions and withdrawals.
CURRENT ACCOUNTS
One for each partner
Record share of profits/losses, drawings, salary payments, etc.
Double entries for the set up of a partnership.
Dr Bank Cr Capital (Partner A) Cr Capital (Partner B)
Methods of profit sharing.
Interest on capital Interest on drawings Partners' salaries Share of residue (what is left after dealing with 1-3) Go in income statement.
Double entries for profit sharing.
Dr P&L appropriation account
Cr Partner current accounts (individually)
If amounts are actually paid (e.g. salary) then:
Dr Current a/c
Cr Bank
Where do capital and current account go?
SoFP
Sum of both partners
PARTNERSHIP AGREEMENT
Does not need to be written- but advisable.
Agreement may be implied by conduct.
If a dispute arises, must look at courts to decide.
What happens if no partnership agreement?
Partnership Act states that in this case:
- Profits and losses to be shared equally.
- No interest allowed on capital.
- No interest to be charged on drawings.
- Salaries are not allowed.
- If partners put capital in to the business in excess of the amount hey agreed to subscribe, they are entitled to interest at a rate of 5% per annum.
What happens if there are changes in membership?
If ownership changes this creates a new business- partnership not a separate legal entity.
Result- upon change partners due their share of accumulated profits and losses.
Need to think about current value of assets, not just book value.
When there is a change in ownership goodwill must be valued to avoid unfair gains and losses between partners.
GOODWILL
What is value of business as a whole?
E.g. client list, skills & knowledge, relationships built up with suppliers, etc.
Effectively try to value the reputation of the business.
Not normally entered into accounts.
Unless agreed otherwise, partners share goodwill in same proportion as profit sharing agreement.
Double entries for someone leaving partnership.
Assets revalued, goodwill written off. E.g. Dr L&B (increase in value) Dr P&M (increase in value) Dr Goodwill (remove) Cr Inventory (decrease in value) Cr Receivables (decrease in value) Cr Revaluations a/c (total revaluation amount)
THEN SHARE BETWEEN PARTNERS
Dr Revaluation a/c
Cr Capital a/c A
Cr Capital a/c B
Cr Capital a/c C
If A is leaving, he is entitled to his contributed capital plus the increase/decrease in revaluation amount.
Dr Capital A
Dr Current A
Cr Bank
Have to remove goodwill (share between remaining partners)
Dr Capital
Cr Goodwill
What are the steps of dissolving a partnership?
- Assets disposed of
- Settle all debts, other than amounts due to partners
- Repay any partner loans
- Settle amounts on partner capital and current accounts
Double entries for dissolving a partnership.
- Use book value
Dr Realisations
Cr Assets - Cash from sale of assets
Dr Bank
Cr Realisations - Settle liabilities
Dr Liabilities
Cr Bank - Expenses of realisation
Dr Realisations a/c
Cr Bank - Assets taken over by partners at valuation
Dr Capital
Cr Realisations a/c - Profit on realisation
Dr Realisations a/c
Cr Capital a/c
What happens if one of the partners has a debit balance on their capital account on wind up?
If possible, the partner should pay money in to the partnership to clear the debt.
If they cannot pay, they will be liable for the debt.
LIMITED LIABILITY PARTNERSHIP (LLP)
Limited Liability Partnership Act 2000 allows a new type of business.
LLP is a separate legal entity.
Apart from some exemptions, members have limited liability to the amount of their capital.
LLP must file accounts with Companies House and have audit.
Member agreement essential.
No limit to number of members.
Exemptions to limited liability of LLP members.
- Member personally at fault in giving rise to a cause of action, they may have unlimited personal liability.
- If LLP insolvent, members may be required to repay all property withdrawn in the last two years.
